Look Who's REALLY Footing The Bill In The $25 Billion Mortgage Settlement With The Mega-Banks

“On February 9, the Department of Justice, the U.S. Department
of Housing and Urban Development, other federal agencies, and
49 state attorneys general announced the largest federal and
state settlement agreement in history with the five major
mortgage servicers for their mortgage servicing practices. The
agreement has the potential to help nearly two million American
homeowners through a variety of means, including loss
mitigation tools such as principal reduction and refinancing of
loans for borrowers who owe more on their house than it is
worth (“underwater” homeowners), payments of billions of
dollars to federal and state parties, and payments directly to
individuals who lost their homes to foreclosure and meet
certain other criteria.” The public seemed to buy right into
this news. After all, $25bil being paid by the bank
sounds pretty tough right? Upon news of the $25bil
Mortgage settlement many media members gushed over President Obama’s “accountability”
of these banks. President Obama said himself that it
was about “standing up for the American people” and “holding
those who broke the law accountable.”

What’s the Truth?

Only $5bil of the $25bil is actual cash being paid out by the
banks. The banks earn “credits” for the remaining $20bil
by modifying either loans that they own on their own books or
securitized private label MBS that they service. Which will
they choose to modify? Alison Frankel described the incentives last
week in this article, “Banks receive a $1 credit for every
dollar of principal they reduce in a loan they own outright.
They earn a 45 cent credit for every dollar written down on a
securitized loan. That incentive, in combination with the
strictures of the pooling and servicing agreements with
investors, was intended to limit the number of securitized
mortgages the banks would modify.”

The major question you should be asking yourself, and
the overall premise of this article, is why are non-agency
mortgage investors who did no harm being asked to foot the bill
for the sins of the TBTF
robo-signers? If you were a bank
holding a loan at par, would you rather modify a given loan and
take a dollar for dollar capital hit to get a credit towards
the $20bil bogey, or modify twice as much of a MBS holders loan
that you service (taking no capital hit yourself) and get the
same credit? As former SIGTARP Neil Barofsky tells
Bloomberg, ”this would be comical if it wasn’t so
tragic”.

Massive 1st Lien vs 2nd Lien Conflict of
Interest- It isn’t even as simple as an “all
else equal” decision for banks. Frankel continued to hit the
nail on the head “Most securitized mortgages, remember, are
first-lien loans. The vast majority of second-lien loans, by
contrast, are bank-owned. When banks reduce the principal in a
first-lien mortgage, they improve their own prospects as a
second-lien holder….The Association of Mortgage Investors
highlighted the conflict between first and second lien owners
in a statement issued immediately after the settlement
documents were released. “The settlement is expected to also
draw billions of dollars from those not a party to the
settlement (because) it places first and second lien priority
in conflict with its original construct,” the AMI press release
said. “It is unfair to settle claims against the robosigners
with other people’s funds.”

-On a mid-February conference call, the HUD’s secretary Sean
Donovan reportedly promised the MBS bondholders on the call
that a maximum of 15% of modified loans by the five banks could
be on securitized loans. Others were under the impression
that the final settlement would have this 15% cap in writing.
Needless to say, when the final report was released,
there was no sign of any limit. ”If we’ve missed
(documentation of the 15 percent cap), please Secretary
Donovan, let us know where it is,” said Vincent Fiorillo, a
portfolio manager at DoubleLine
Capital and president of the board of the Association of
Mortgage Investors.

-Just this past week, and presumably in response to heat they
are feeling, the HUD put out a “Myth vs Fact” blog post on the HUD
website. A few curious statements are written within the
modifications within securitized trusts section
including:

“…principal write down modifications must be NPV
positive…”. If these loans are NPV positive,
shouldn’t they have been modified already?